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Lloyd Mexico Economic Report November 2004

Table of Contents

Stock market at record high
Retail sales rising
Mexican multinationals
Record acquisition by Mexican firm
Exports hit new high
Reduction in base money
Alternative supply of natural gas
Electronic receipts
Nike prefers Mexico to China
Support for small businesses
Regional airports relieve pressure
Torreon - Mexico's Phoenix?
Maytag expands production
Mexico tackles greenhouse gases
Francises booming

Stock market at record high

The Mexican Stock Market has become one of the world's most profitable for investors. In the first nine months of this year, its main index, the IPC, rose 24.7% in dollar terms, to pass the 11,000 barrier for the first time. This is the highest return in Latin America, and the second highest in the world, for that period.

The stock market strength underlines the confidence investors have in Mexico's economic policy. Many analysts are predicting that the IPC will break the 13,000 barrier sometime next year. Some analysts are even more optimistic, forecasting that the 14,000 point barrier will also be exceeded.


Retail sales rising

The latest figures from the National Association of Supermarkets and Department Stores (ANTAD) show that the total recorded sales of its 101 members reached 26.665 billion pesos in August, 8% higher than the same month a year earlier. Cumulative sales for the first eight months were also up 8.8% to 201 billion pesos, with "same-store" sales up 3%. The nation's single largest retailer, Wal-Mart, is not an ANTAD member.


Mexican multinationals

Several Mexican corporations are on the list of the fifty largest non-financial multinationals headquartered in developing world countries. Not surprisingly, Asian companies dominate the list, which is compiled by the United Nations Conference on Trade and Development.

In order of assets, the largest Mexican multinational is Cemex (the cement maker with overseas assets of 12.193 billion dollars and annual foreign sales of 45.403 billion dollars), followed by América Móvil (telecommunications), Grupo Bimbo (bakery products), Gruma (corn flour and food products), Savia (seeds, food distribution) and IMSA (steel and plastics).


Record acquisition by Mexican firm

Cemex, based in Monterrey, is a world leader in cement production and distribution technology and has been an aggressive acquirer of foreign cement makers on several continents over the past five or six years. Now, the world's third largest cement manufacturer (after French firm Lafarge and Swiss company Holcim) has made an offer to purchase the British firm RMC Group, the world's largest supplier of ready-mixed concrete, for 5.8 billion dollars.

RMC (2003 sales: 7.8 billion dollars) has an installed capacity of 12 million metric tons a year with plants in several European countries, including U.K., Germany, Ukraine and Poland. If approved, the deal would be the largest acquisition ever by a Mexican company.


Exports hit new high

Mexican exports hit record levels in August, when they were worth 16.962 billion dollars, 27.3% more than during the same month in 2003. Much of the increase resulted from continued reactivation of maquiladora plants, responsible for 48% of exports by value, in response to the improved economic outlook north of the border.

Not surprisingly, given record world oil prices, oil exports also reached record levels. Petro exports brought in 2.075 billion dollars in August, 35.5% higher than a year earlier.


Reduction in base money

In order to maintain its tight control on inflation, the central bank, Banco de México (Banxico), has increased the daily "short" (the value of pesos taken out of circulation by the central bank to reduce liquidity) from 45 to 51 million pesos a day.

Inflation for the twelve months that ended September 30 was 5.05%, still well above the official 2004 inflation target of 4%. The short has been a key element in the central bank's monetary policy since 1998.


Alternative supply of natural gas

At present, all the natural gas used by the Federal Electricity Commission (CFE) in its gas-fired and combined-cycle power stations is supplied by Petroleos Mexicanos (Pemex). However, to cut costs and guarantee future supply, CFE is now setting up its own system relying on imported natural gas. In the long run, such a system would benefit many other industries and domestic users of natural gas. In addition, any surplus gas could be sold to U.S. industries.

Nationwide, demand for natural gas is rising about 10% a year. For the plan to work, CFE needs several regasification plants for the conversion of imported liquid natural gas (LNG). All permits are reported to be in place for the first plant, in Altamira (Tamaulipas), and a second plant, in Lázaro Cárdenas (Michoacán), is nearing final approval. CFE plans to import gas from countries such as Venezuela, Bolivia and Malaysia.


Electronic receipts

Recent changes to federal tax regulations now permit many companies to issue electronic or e-receipts (facturas) in place of conventional hard-copy ones. Why does this matter? Because it will save many corporations a small fortune.

For instance, it is estimated that major retailers such as Wal-Mart and Soriana issue as many as 800,000 receipts each month. According to Lourdes Sánchez de la Vega, the CEO of the Mexican Association for Electronic Commerce Standards, a traditional receipt costs between 120 and 150 pesos in operating and administrative costs, compared with between 24 and 30 pesos for its electronic counterpart.

With savings of up to 80% of the costs associated with receipts, it is clear that more and more companies will switch to issuing e-receipts. It is anticipated that more than 2,000 firms will be using e-receipts, validated by certified electronic signatures, by the end of this year.


Nike prefers Mexico to China

Nike, the world's largest manufacturer of sports shoes (first quarter sales: 326 million dollars), has announced it is moving its production contracts from China to Mexico. The move makes it easier for Nike to supply the rapidly growing U.S. market where sales were up 11% over the summer months of June, July and August.

Nike, based in Oregon, subcontracts the production of all the items sporting any of its brand-names: Nike, Converse, Nike Golf, Bauer Nike Hockey and Cole Haan. The corporation joins a growing list of firms, including Sara Lee, Procter & Gamble, Xerox, Nissan, Samsung, Daewoo and Motorola, that have decided that Mexico offers better conditions and opportunities for manufacturing than China.


Support for small businesses

The Spanish acronym for pequeñas y medianas empresas (small and medium-sized companies) is pymes. The Interamerican Development Bank is making 26 million dollars available this year for 23 projects assisting Mexican pymes. Some of the projects are already under way.

The IDB says that in order to succeed, pymes need stable macroeconomic conditions, improved access to financing and help with incorporating the latest technology into their productive chains. Further simplification of administrative procedures would also help. Since most of these conditions are now found in Mexico, pymes look to have a bright future.

One IDB project is a fund (Latin Idea Venture Capital Fund II) which will allocate 5 million dollars to help pymes specializing in technology. A further 19.5 million dollars is expected to come from Nacional Financiera and the National Science and Technology Council and Mexican investors.

IDB is also funding an initiative from the Social Development Secretariat which aims to create incentives for informal businesses (those that are not registered with the taxation authorities) to enter the formal, tax-paying sector.


Regional airports relieve pressure

Pressures on Mexico City international airport have eased over the past year as four smaller regional airports - Toluca, Puebla, Querétaro and Cuernavaca - have expanded their operations. The smaller airports are now handling 160 national and international passenger flights each week for domestic carriers such as Aeroméxico, Mexicana, Aerocaribe, Aerolitoral and Aerocalifornia.

Research has shown that many of the 22 million users of Mexico City airport a year would opt to fly from a smaller airport, if the opportunity existed. It is hoped that between 10 and 15% of these passengers will find viable alternatives using the regional airports by the end of next year.

The reduction in passenger movements through Mexico City airport not only eases the problems of congestion at the airport, but also improves traffic flow between the airport and the city.


Torreon - Mexico's Phoenix?

The city of Torreón in northern Mexico has attracted investments of around 700 million dollars in recent years for hotels (Camino Real, Best Westin, Crown Plaza, Hampton Inn and Fiesta Inn), shopping centers and two new golf courses. The airport has been upgraded and now has direct flights to Dallas.

One local business group, Grupo Destino Laguna (GDL), confident that the city's growth can continue, promotes the surrounding region, known as La Laguna, as the ideal location for a significant tourist industry based on golf, seen as an "anchor activity" for attracting other investments. In the longer term, GDL also hopes to persuade some of the 80 million U.S. "babyboomers" who will be retiring in the next decade to relocate south of the border.

Why golf? According to Ignacio Aguirre, GDL's CEO, the group was inspired by the success of Phoenix, Arizona, which in the early 1960s was similar to Torreón today in being primarily an agricultural center with a population of around 500,000. Both cities have warm, dry weather that guarantees good playing conditions year round. Phoenix now boasts more than 200 golf courses, as many as there are in all of Mexico.

Golfers are regarded as premium tourists, with higher than average expenditures while on holiday. These expenditures generate a multiplier effect in local economies that extends far beyond hotels, restaurants and taxi drivers. A recent study found that the average expenditure per person of the 224,000 international golfing visitors to Mexico in 2003 was over 700 dollars.

However, Torreón is not the only city interested in getting a share of the action. At the third annual Tianguis Golf y Spa trade show being held later this month (November 15-18) in Morelia, specialized tour operators from Europe, U.S. and Canada, will meet their domestic counterparts and representatives of airlines, hotels and convention centers.


Maytag expands production

Maytag, the U.S. manufacturer of domestic appliances (washing machines, dryers, stoves, refrigerators and dishwashers), has invested 55 million dollars in a refrigerator plant in Reynosa, Tamaulipas. By the end of the year, production at the plant is expected to reach 1,000 a day, with 90% of production destined for export. Maytag's market share in Mexico is 7.5% at present, but it anticipates this figure rising to 20% within four years. The firm has three plants in Reynosa, Tamaulipas, as well as one in Ciudad Juárez, and will soon be opening a dedicated store, its first in Mexico, in the city of Monterrey.


Mexico tackles greenhouse gases

According to the World Resources Institute (WRI), Mexico is the 14th largest emitter of greenhouse gases (GHG) in the world, with GHG emissions in 2000 equivalent to 1.4 metric tons per person. The comparative figure for the U.S. is 6.6 tons.

In August, Mexico became the first country to adopt internationally-accepted standards to measure and report business greenhouse gas (GHG) emissions as a first step towards establishing a voluntary national GHG reduction program. Reporting of GHG emissions will follow the Greenhouse Gas Protocol, jointly developed by the World Resources Institute and the World Business Council for Sustainable Development (WBCSD). Many individual industries have already adopted the GHG Protocol, but Mexico becomes the first country to do so.

A pilot program, expected to last two years, will help businesses apply accounting approaches to quantify GHG emissions, identify GHG reduction opportunities, and attract new technologies and investments to reduce local air pollutants and mitigate global climate change.

According to Jonathan Lash, WRI president, "In the absence of international leadership in tackling climate change, Mexico has taken the lead in showing what can be done to mitigate global warming."


Francises booming

The franchise sector in Mexico is growing at almost 20% a year, exceeding all expectations. In the first half of this year, 135 new franchises and 5,250 new points-of-sale were established, creating 57,000 new jobs. According to market surveys, franchises now account for 15% of all consumer purchases. The latest franchises include dental clinics, home construction companies and catalog sales.





The text of this report was not submitted to any Federal Mexican Authorities or approved by them prior to publication. In preparing it, we have done our own research, using sources we believe to be reliable. However, we do not guarantee its accuracy. Neither the information contained herein nor the opinions expressed, constitute a solicitation by us of the purchase of any security.

Mirrored with permission from Lloyd S.A. de C.V.
See their Page on Mexico Connect.

2004 Operadora de Fondos Lloyd, S.A.
© 2004 Allen W. Lloyd, S.A. de C.V.

Published or Updated on: July 20, 2006
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